ODIOUS DEBT: WHICH WAY FORWARD

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ODIOUS DEBT WHICH WAY FORWARD? By
Professor Victor Murinde The University of
Birmingham
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• 1. THE ISSUE
• Many African countries are carrying huge debts
  incurred by past rulers who borrowed
  recklessly
• The rulers used the finance either to repress
  the people or for personal gains
• The duck test!
• Odious debt!
• We need a new approach to prevent profligate
  dictators from running up debts, looting
  their countries, and passing on their debts to
  the population

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• 2. THE LEGAL DIMENSION
• Surely, the law is clear !
• Individuals do not have to repay if others
  fraudulently borrow in their name
• Companies are not liable for contracts that
  their top managers enter into without the
  appropriate authority
• These legal precedents imply that sovereign
  debt which is neither sanctioned by, nor for
  the benefit of, the people is ODIOUS and should
  not be honoured by successor governments
• This is all the more important if creditors are
  aware of these facts in advance

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• 3. SAMPLE CASES
• Historical case odious debt originated in 1898
  after the Spanish-American war
• African cases are well-known (duck test)

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• African cases of odious debt
• Apartheid government of South Africa spent
  heavily on police and military to repress the
  African majority
• The South African people now bear the debts of
  their repressors can neither default (credit
  risk rating) nor ask for debt forgiveness
  (non-HIPC)?
• Mobutu Sese Seko (Congo) is thought to have
  expropriated US4 billion to personal accounts
• Sani Abacha (Nigeria) reportedly held US2
  billion in Swiss bank accounts in 1999.
  Nigeria recently recouped some of the money.

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• Outside Africa, cases of odious debts include
• Anastasio Somoza of Nicaragua reported looted
  US100-500 million
• Ferdinand Marcos of Philippines amassed a
  US10 billion fortune
• Jean-Claude Duvalier of Haiti is said to have
  absconded with US900 million

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• 4. THE WAY FORWARD A NEW APPROACH
• Researchers have been busy pounding away at
  this issue
• Michael Kremer and Seema Jayachandran (2001,
  2002)
• Patricia Adams (1991)
• Victor Murinde (1996)

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• Existing practice
• African countries repay debt even if it is
  odious (the original sin hypothesis?)
• If the countries refused to pay, their assets
  abroad could be seized, credit ratings would
  fall, the countries would neither borrow again
  nor attract foreign direct investment

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• Proposed approach
• An institution to assess and announce whether
  regimes are odious
• The idea is to create an equilibrium for market
  outcome
• Countries would refuse to pay illegitimate
  funds
• The worlds leading powers and international
  organisations, declare a regime odious hence a
  successor government may repudiate the loan
• Unscrupulous private banks?
• Game theory?

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• Possible challenges and opportunities
• Lending to odious regimes may persist because
  not everyone coordinates on the new equilibrium
• Three mechanisms are necessary
• First, odious debt should be made legally
  unenforcable i.e. the law in creditor
  countries should be reviewed to disallow seizure
  of a countrys assets for non-repayment of
  odious debt
• donors could refuse aid into a host country
  that is repaying illegitimate claims
• moral hazard arguments limit international
  bailouts of governments that borrow for
  non-economic ends.

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• Special appeal of the proposed approach
• The new approach is better than trade sanctions
  (it is incentive compatible)
• While third parties have incentives to evade
  most trade sanctions, curtailing odious debt is
  a self- enforcing sanction
• While trade sanctions often harm the people
  they are intended to help, curtailing the
  dictators ability to borrow, loot and saddle
  the people with large debts would hurt
  illegitimate regimes but help their populations

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• Will the proposed institution be so truthful?
• How do we ensure that the institution charged
  with assessing the legitimacy of debt will be so
  truthful?
• The institution should be empowered to rule
  only on future loans to a government and not on
  existing debt

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• Picking the judges? The institutions integrity
• If the regime is odious, then no future
  borrowing
• A new international judicial body that hears
  cases brought against particular regimes,
  similar to the International Court of Justice in
  the Hague or the proposed International Criminal
  Court
• United Nations Security Council may block an
  odious country from borrowing

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• A high integrity NGO may be designed to
  identify which regimes are odious
• The international community jointly with local
  NGOs to consider the growing recognition in
  international law that some government official
  use power illegitimately or criminally
• NEPAD peer monitoring.

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• 5. CONCLUSION
• Africa must break away from the odious debt
• One way forward is to have an institution for
  judging odiousness (could take any of the 5
  forms)
• The idea is to promote legitimate lending and
  borrowing, and protect African countries from
  odious debt

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• Creditors would also benefit from knowing the
  rules of the game in advance odiousness is
  declared in advance and banks face serious risk
  of default if they lend
• Most importantly, dictators would no longer to
  be able to borrow, use the funds for
  illegitimate purposes and saddle the people with
  the debts.
• VERDICT This meeting should form a Task Force
  on Africas Odious Debt